Start Making Sense

Thursday, August 17, 2017

I've been ruminating lately about the above-named Beatles song, perhaps in part because we're at a time and in a place where things do not seem working out for our country or the world, on many levels, but also due to its own extraordinary merits, beauty, and pathos - despite its surface optimism - as a song.

There's a longstanding genre of popular songs in which the character played by the singer conspicuously doesn't get it, adding irony and pathos to his or her romantic plight. To name two examples from songs covered by the Beatles, in "Please, Mr. Postman" we know perfectly well that it isn't the postman's fault no letters are arriving from the loved one. The singer is deflecting his (or in the Marvelettes' original version her) anxiety away from the real source of the problem.

Likewise, in "Slow Down," the woman who's "moving way too fast," and who needs to "gimme a little loving ... if you want our love to last," plainly doesn't want it to last. She's got a "boyfriend down the street," after all. So the singer is petitioning her in vain, and misdiagnosing the problem because it's less painful than admitting straight up that she has dumped him.

"We Can Work It Out" is a subtler, less overt version of this self-deceiving narrator motif. The song (mainly written by McCartney) opens mid-argument - we don't hear what the argument is actually about - with the singer insisting that his girlfriend see it "my way," not hers. "Do I have to keep on talking till I can't go on?"

This is not generally a good way of bridging disagreements: You don't say to the other person: "your way" is wrong, stop exasperating me. And for that matter, the singer openly admits that "my way" offers no guarantees. They will either "get it straight or say good night," and "only time will tell if I am right or I am wrong."

So you get the infectious optimism of the singer's insistence that "we can work it out" - conveyed also by the vocal performance, yet undercut by the realization that they probably won't work it out, that he is approaching it the wrong way - without adequate sympathy, flexibility, or understanding - and that he pretty much realizes where they're likely headed, even as this remains the best he can do to try to head it off.

One of the song's widely noted merits is the back-and-forth between McCartney's verses, which I've been quoting so far, and Lennon's terse middle-eight ("Life is very short and there's no time / For fussing and fighting my friend"). That section provides a great change of pace and musical contrast, but it's not really pessimism undercutting optimism, so much as weariness and impatience undercutting the pretense of optimism. And the slowdown at its end into 3/4 time as they head back to the verse ("So I will ask you once again ...") adds to the sense of impatience, impending failure, and just being stuck.

"We can work it out / We can work it out," the song ends - the singer radiating enthusiasm that is clearly just a thin shell masking anxiety - followed by a striking minor-key chord run on the harmonium that's held for a few seconds.

The media pervasively uses the term "tax reform" to describe the income tax changes that the Republicans are seeking. And it pervasively compares these changes to 1986 tax reform. This should stop.

My reason for saying this is not just rhetorical - it's about using terms meaningfully to convey information. But I'll admit that the rhetorical aspect matters here. "Tax reform" sounds like it's a good thing. I happen to think that any tax changes that the Republican Congress passes and Trump signs will be horrendously bad - increasing the fiscal gap, hugely benefiting the top 0.1% at the expense of everyone else, and very possibly un-leveling the playing field (e.g., in favor of "business owners" at the expense of "employees"). But there's more than just rhetoric going on here - there's an implicit descriptive claim that appears to be false.

Historically, one thing that "tax reform" has meant is indeed "changes that I, the proponent, think are good." So by definition anyone who wants to change the tax laws is proposing "tax reform," and anyone who opposes those changes doesn't think that they constitute "tax reform."

But historically it has long had a more specific meaning than that, as I discussed in my 5/25/11 Tax Notes article, "1986-Style Tax Reform: A Good Idea Whose Time Has Passed." And the Republican plans aren't sufficiently well-related to this idea in order to be called "tax reform," other than in the "we think it's good, even if you think it's bad" sense.

From at least the 1950s through the early 1980s, "tax reform" tended to mean repealing income tax preferences, and broadening the tax base, so that the tax would become more progressive, with the high statutory rates at top income levels coming closer to be true effective rates.

Thus, for example, the Reagan changes in 1981 - mainly, greatly reducing income tax rates and speeding up cost recovery for business assets - weren't called "tax reform." Obviously, the proponents thought that these were good changes, but they didn't use a label that they knew meant something else.

Then the meaning of "tax reform" changed. A key moment was the introduction of Bradley-Gephardt by two Democrats, followed by Kemp-Kasten by two Republicans. The Reagan Administration Treasury I and Treasury II plans, followed by House and Senate bills that gave rise to the enactment of the Tax Reform Act of 1986, cemented the new meaning.

Now "tax reform" meant broadening the base and lowering the rates, with the aim of being both revenue-neutral and distribution-neutral. So it was no longer about increasing progressivity, but it also wasn't about reducing it.

Whether or not this is a good model, it is what the term "tax reform" has generally meant for more than 30 years. (In the above-cited article, I argue that it's no longer a good model for how we should change the tax laws.) The line of argument for it, which is pretty compelling if one agrees that the "preferences" it would eliminate are bad, relies (perhaps naively) on horizontal equity between taxpayers along with inter-asset neutrality. The underlying political economy theory holds that stuff Congress put in that diverges from taxing all income the same is likely to reflect interest group politics, administrative problems, or something else other than good policymaking.

More recent Republican-led "tax reform" efforts have often aimed at something quite different: reducing not only tax rates but progressivity and net revenue. Not always - Dave Camp's international tax reform plan when he was House Ways and Means chair tried to do something akin to "tax reform" as typically defined. And Mitt Romney in 2012 at least gestured towards revenue and distributional neutrality, although he was rightly criticized because that was not realistically achievable under his parameters (which he had deliberately left vague).

Now, however, Republicans in both the Administration and Capital Hill are pretty clearly - although there is occasional lying about it - aiming to reduce business taxation, reduce progressivity, and reduce revenues. Reducing tax rates is now the main feature, rather than one of two paired features. There may be some offsetting items that at least arguably constitute base-broadening, but they will be greatly outweighed by the rest of it.

This also, notoriously, will no longer be a bipartisan process. The idea of being revenue-neutral and distribution-neutral was crucial to the once-bipartisan character of "tax reform." In effect, the Democrats and Republicans said to each other: "Since we disagree about distribution and revenue levels, let's take all that off the table and find things about which we can agree." One reason that the likes of McConnell are so vehement about excluding Democrats from the process is that it would push them towards retaining those features, which they now oppose.

BTW, just as an aside, in the academic community the chief focus of discussion and interest has long since moved past 1986-style exercises. When we talk about tax reform, we are usually focused (whether pro or con) on (a) partially or wholly switching from income taxation to consumption taxation, and/or (b) finding more neutral ways to tax business income, be it domestically or internationally. This often proceeds under the view that revenue and/or distributional neutrality should be a key feature of the switch, so as to keep the main focus on the structural issues.

Okay, back to the bottom line. The term "tax reform" has come to have a clear historical meaning, beyond simply "we think this is good," based on attributes that emerging Republican proposals in Washington are certain to lack. So let's drop any pretense that the term is properly descriptive, other than in the sense that the proponents of course are arguing that their proposals are good.

And let's drop the analogy to 1986, which involved a very different set of changes, adopted in a very different era through a very different process. It's not illuminating here.

Friday, August 11, 2017

I am sad to pass on the news that Harry Grubert, longtime Senior Research Economist in the Office of Tax Analysis at the U.S. Department of the Treasury, and also a friend I greatly admired, has died quietly from a long-term illness.

Harry had more knowledge about U.S. international taxation than any other living individual. I'm not referring to legal knowledge, of course, as he was an economist - albeit, an exceptionally well-informed one about the law. But his long years of research and study regarding U.S. multinational firms, based on tax data that he understood better than anyone else, made him an extraordinary resource, almost like a public utility in light of his kind generosity and willingness to share what he knew.

He was also a leading scholar who developed a number of interesting and important international tax reform ideas (often in coauthored work with Rosanne Altshuler), and one whose research yielded innumerable consequential empirical findings - for example, regarding the costs associated with U.S. multinationals keeping their funds tied up abroad.

I would generally see him a couple of times a year at research conferences, most recently in Oxford this past May. And he was a presenter at the NYU Tax Policy Colloquium, I believe three times. We wouldn't have kept asking him back if he hadn't combined excellent and important papers with being a great presenter and fount of knowledge as well as wisdom.

As a matter of style, Harry was a fox, not a hedgehog - he knew many things (and I do mean many), rather than being inclined to focus on one big thing. If you'd ask him, say, about Rule or Proposal X's effects, he'd say: Here are the 17 margins at which it has an impact. He could even snap at the hedgehogs a bit, when the mood took him (suitably to the metaphor, I suppose). But his kindness and generosity always prevailed, with all who engaged with him.

Thursday, August 03, 2017

Buddy, age 14 and a member of our household since he was 10 months old, is not looking good - this photo perhaps fails to capture the full dinginess and fatigue that you can see on him in person - and evidently is not feeling good. He just sits like this in one place all day, sometimes a sheltered place. He has multiple progressing medical conditions, including a tumor, a heart murmur, and most recently diabetes. We're not certain yet, but it appears today that he may have decided to stop eating.

Until recently he'd been sick only once in the entire time that we have had him. Energetic (one of the great escape artists of his generation), easygoing (albeit manically energetic as a kitten), and unfailingly benign in temperament, he has been a great companion for a very long time. He likes (liked?) to lick people he knows on the nose. It hurts to see him like this.

The vet will see him tomorrow, and perhaps we'll know more then.

UPDATE (8/6/17) - He's eating small quantities of things that are very fragrant and appealing (e.g., bonito flakes). The vet thinks the cancer may have spread to his lymph nodes; gives him a week or two. We're trying to keep him as happy and comfortable as possible in the interim.

UPDATE (8/14/17) - Buddy died tonight, hopefully without much pain. Tapped out about what to say, but a great cat who had I think a good life.

Monday, July 31, 2017

A month ago (on June 30), I gave a talk at the Oxford Summer Conference entitled "A U.S. View of the EU State Aid Cases." I briefly blogged about it here, and posted a link to my slides, which are available here.

The Oxford folks have now posted videos of all the sessions at the Sumer Conference, and a video of my talk is available here.

Friday, July 28, 2017

Six
Republicans in leadership positions with respect to tax policy - Ryan,
McConnell, Mnuchin, Cohn, Hatch, and Brady - have now issued a public statement regarding
their plans for significant tax legislation, which they call "tax
reform." It appears to promise a more open, conventional, and
committee-based process than that which the Republicans used with respect to
healthcare. Other than that, here is the key paragraph, broken down
sentence-by-sentence with my annotations after each:

"We have always been in agreement that tax relief for American
families should be at the heart of our plan." Comment:This
is standard boilerplate. "Tax relief for American families," in the
sense that this term is meant to have (e.g., middle-income two-parent
households with children), will get only a small percentage of the benefits, if
indeed they get any.

"We also believe there should be a lower tax rate for small
businesses so they can compete with larger ones, and lower rates for all
American businesses so they can compete with foreign ones."Comment: This appears to mean that the self-employed, even if they are
extremely high-income, will pay lower tax rates than employees. I've commented
previously on what a poor design feature this is. But there is admittedly an
underlying dilemma here. All else equal, it might make sense to align the tax
rates of small business and large business. And it might make sense to lower
the tax rates for internationally mobile capital income insofar as it is only
lowering the "normal" rate of return. But it makes no sense to tax
employees at higher tax rates than the self-employed, and it's also likely to
be extremely regressive. There are indeed ways out of the box, but they
generally would require more significant structural changes than these folks
appear to be contemplating at this point.

"The goal is a plan that reduces tax rates as much as possible,
allows unprecedented capital expensing, places a priority on
permanence, and creates a system that encourages American companies to
bring back jobs and profits trapped overseas."Comment:
They're not committing to how much they'll cut tax rates, but this
(unsurprisingly) means as a practical matter that the proposal will lose
revenue, requiring it to be phased out after 10 years unless they come up with
some trick to avoid that result. "Unprecedented capital expensing" is
a consumption tax-like result that would make more sense if accompanied by
interest deduction limits, on which they are at this point silent.
"Permanence" seems to mean they want to avoid the phaseout if
possible, by one means or another, but I think it will be impossible unless
they play games with the budget rules. "Bring back jobs" doesn't have
a definite meaning unless it refers to lowering the corporate rate. Shifting to
a territorial system (which I'd presume they'd want to do) is hard to square
with these words rhetorically. The reference to profits taxed overseas presumably means that they anticipate no longer taxing U.S. companies' dividends from foreign subsidiaries -
suggesting the enactment of territoriality - perhaps with a deemed
repatriation at the transition. I've for years advocated taxing deemed
repatriations, to address the foreign profits issue, but I suspect they'd have
a very low repatriation tax rate, because otherwise the taxpayers subject to it (who
have friends) might be unhappy.

"And we are now confident that, without transitioning to a
new domestic consumption-based tax system, there is a viable approach
for ensuring a level playing field between American and foreign companies and
workers, while protecting American jobs and the U.S. tax base. While we have
debated the pro-growth benefits of border adjustability, we appreciate that
there are many unknowns associated with it and have decided to set this policy
aside in order to advance tax reform."Comment: That one
speaks for itself. Buh-bye to the destination-based cash flow tax, at least for
now. Ryan and Brady would have been politically unwise to fight further on this
front.

We now have a tentative speaker schedule for the 2018 NYU Tax Policy Colloquium, which I will be co-teaching with Lily Batchelder. We'll be meeting on Tuesdays, from 4:10 to 6 pm, in Vanderbilt 208 (our usual room). It goes like this:

9. Tuesday, March 27 – Damon Jones,
University of Chicago Harris School of Public Policy.

10. Tuesday, April 3 – Ajay Mehrotra,
American Bar Foundation and Northwestern University School of Law.

11. Tuesday, April 10 – Jason Furman,
Harvard Kennedy School.

12. Tuesday, April 17 – Emily
Satterthwaite, University of Toronto Law School.

13. Tuesday, April 24 – Wolfgang Schon,
Max Planck Institute.

14. Tuesday, May 1 – Joshua Blank, NYU Law
School.Leaving aside the horror of its being winter again at the time when the colloquium starts - and that will have happened anyway by then, colloquium or no colloquium - I'm looking forward to 14 interesting and diverse papers and discussions, and to another great semester.

Sunday, July 02, 2017

The amount I read for pleasure on my travels was reduced by my also needing to read papers that were being presented, while also polishing my presentations and working on my literature book. But, during the Mexico City and Oxford trips, I did get to read most of (1) Chimamanda Adichie's Americanah, and (2) Henry Blake Fuller's With the Procession.

In Americanah, it's a bit depressing from the perspective of 2017 to read about the characters' response to Obama's election and inauguration. But it's a really excellent work of both narrative fiction and sociology. A friend suggested that I consider it for my literature book, in which I'm not absolutely set on all of my current-era choices. But while it deals with class, and while I ought to deal with U.S. race-class interactions at some point, I don't see it as sufficiently directed at my particular interests in the book (as distinct from, as an American living in our society today).

With the Procession was published by Fuller in 1894 and is set in Gilded Age Chicago. I had decided, after initial inquiry well short of a full read, not to include it among my 3 U.S. Gilded Age chapters (which will deal in turn with Twain & Warner's The Gilded Age, Dreiser's The Financier and The Titan, and Wharton's House of Mirth). But it's sharply satiric and quite good, and certainly makes the list of the next 3 that I would have done from this era if I were spending more chapters on it (the others being William Dean Howells' The Rise of Silas Lapham, which I like but don't love, and Booth Tarkington's quite interesting The Magnificent Ambersons).

For those who might be interested, With the Procession is available as a free Kindle download from Amazon, although for some reason it can be hard to find in this format on their website.

On Friday I spoke at the Oxford University Centre for Business Taxation's Summer Conference. This is a public event with a large audience, discussing matters of general tax policy interest, as distinct from the academic conference earlier in the week, which focuses on attendees' works in progress.

I discussed the EC state aid cases, with particular reference to the Apple-Ireland case, on a panel that was more generally focused on issues of tax uncertainty. My slides are available here. They're different and I think better than the slides I posted a few weeks ago when I discussed the same topic at a conference in Luxembourg. They generally aim to be balanced, fair, and above-the-fray.

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 16 and 19) as well as four (!) cats. For my wife Pat's quilting blog, see Patwig’s Blog.